Does the Declining Dollar Affect You?

Current State of Affairs for the Dollar

It was designed to break your heart. And its falling value has an impact on all our lives. (Photo: flickr.com)

Under both the Bush and Obama administrations, U.S. government spending – financed by government borrowing – has skyrocketed, resulting in a prolonged decline of the value of the dollar. This trend escalated with the Federal Reserve’s reaction to the 2008 subprime mortgage crisis and the dramatic drop in interest rates. Today, with interest rates still low and government borrowing still rising, the dollar continues its steady decline. Recently the dollar has reached new all time lows against the Euro and other major currencies resulting in a lot of concern about the dollar’s viability internationally. It has even been argued in some quarters that the United States may have its national credit rating lowered.

Does it Really Matter to Most Americans?

Economic optimists point out that most Americans do not travel abroad for significant periods of time, meaning that currency conversion rates do not matter to them. They also argue that a weak dollar helps the economy by stimulating American exports. Both of these arguments are valid, but they fail to take into account the ways that a declining dollar does affect the domestic economy. While your average American may not have to worry about converting his cash into euros, your average American does buy a lot of imported goods and though the weak dollar does help exports, exports constitute less than 15 percent of the Gross Domestic Product (GDP), so only a few benefit.

The Weak Dollar and the Cost of Imports

Goods that are imported into the United States, even if the trade is denominated in dollars, are directly affected by the value of the dollar. The weaker the dollar is, the less value it has abroad, so those countries exporting to the United States have to increase the price to compensate for this. Among the most vital of these imports is oil, upon which the United States is largely dependent. A weaker dollar means that oil and all of its derivatives increase in price. The same can be said for all imported goods, from clothing and textiles to components in ostensibly “American-made” products. The lower the dollar, the more expensive all imported goods are to the average American consumer.

Dollar Value and Foreign Investment

The United States has been heavily reliant on foreign investment for decades now. Foreign investment in government debt is what keeps the federal government solvent. Similarly, foreign investment in our financial system – banks, major corporations, securities markets – is also essential to keeping the economy sound and money circulating through the system. However, since virtually all of these investments are denominated in dollars, a declining dollar discourages foreign investment. Since the U.S. requires this foreign investment, the logical answer is to make American investments more attractive by increasing the interest rates, but this significantly hurts domestic debtors.

Yes, the Declining Value of the Dollar Does Matter

Although most Americans do not have to worry about directly converting their dollars to foreign currencies, virtually all Americans do have to deal with the increased price of imported goods, from gasoline to running shoes. The point that the weak dollar helps American exports is also valid, but the export sector amounts to less than 15 percent of the economy, whereas the more expensive imports affect virtually all Americans. Further, since the government and financial industry have to encourage continued foreign investment, it means that interest rates are likely to increase, putting increased pressure on domestic debtors, from mortgage holders to people with large credit card bills.

Is There Anything You Can Do About This?

The factors behind the declining dollar are macroeconomic in nature and the key player, the Federal Reserve, is not directly accountable to the public. Those with large investment portfolios may want to consider diversifying some of their holdings into assets denominated in other currencies to serve as a hedge, but this is only an option for a minority of Americans. There may also be some value in investing your retirement and savings in international mutual funds, those based on foreign assets. Otherwise, there are few options available to your average American. Nevertheless, it is important to understand that the declining dollar does directly impact you.